The origins of the Colonial Alliance though go back to the Federation-Cardassian border treaty which left dozens of Federation colony worlds under oppressive Cardassian rule, and led to the formation of the Maquis resistance group.

In the aftermath of the Federation Civil War, the DMZ colonies were left to fend for themselves against Klingon aggression. During that period, Michael Eddington rose to power as the governor of Volon III. In the late 2370s, he began reaching out to the other colonies, to get them to band together in an effort to speak to the Federation Council with one voice. With the help of the starshipsPendragon and Avalon, Eddington and the other Maquis leaders were able to stabilize the region, and the Council offered to take the colonies back into the Federation. Instead, with the support of Bajor and the new democratic government on Cardassia Prime, Eddington successfully lobbied for the Council to grant the colonies independence and recognize them as a sovereign state.

During that period, a research team discovered what was then believed to be an outpost of the ancient Tkon Empire within the Badlands, which fell under the new alliance's jurisdiction. News of the discovery soon reached the RomulanTal Shiar, who had been looking for the outpost's location for decades. The Romulans launched an invasion, supported by the Tzenkethi and Talarians. With Starfleet and Cardassian aid, the Maquis were able to repel the invaders and solidify their hold on the region.

The Colonial Alliance was officially established on 21 December 2385. The colonies elected representatives to serve in the Colonial Parliament, and elected Michael Eddington as its Chairman.

The Colonial Alliance is comprised of approximately three dozen star systems with multiple worlds. Most of those worlds are former Federation colonies, though some were Cardassian colonies or worlds where refugees settled in the aftermath of the Klingon massacres. New Hope City on Volon III is the capital of the Alliance.

The Badlands region also falls under Alliance jurisdiction. After the "Starkindler" incident, a group of previously-hidden star systems was discovered within the Badlands, including one world known as Xhe'na'zha, which was once home to an advanced civilization. Exploration and research in the Badlands is administered by the Alliance under a joint treaty with the UFP and Cardassian Union.

After the Alliance's formation, the Alliance Navy was organized, comprising primarily of former Maquis members and volunteers. The alliance military is headquartered on Liberty Station in the Volan system.

The Navy operates a relatively small fleet starships, mostly Ju'day-class vessels formerly used by the Maquis, as well as several Miranda and Constitution-class ships that were scavenged from surplus yards. The navy is also supported by independent privateers and local "militias."